Ecuador is one of the hardest hit Latin American countries by the Covid-19 pandemic. As of July, the latest figures of detected cases are above 60 thousand and the death toll rate is among the highest of the entire region. Actual data could be even worse, in particular because the port city of Guayaquil, the largest in the country, shocked the world between March and April showing bodies left on the streets as morgues had filled up.

The Andean country, already one with the weakest macroeconomic profiles in Latin America, is trying to cope with the double shock caused by Covid-19 and oil prices plunge. According to Oxford Economics real GDP, already flat in 2019, is going to fall by 8.4% in 2020 and to recover only partially by 5.1% in 2021. However, in case of a strong second wave of contagion, things could worsen further: the GDP fall in 2020 could widen up to 9.3% and, above all, the country could face another year of recession in 2021 (-0.5%); under such scenario the pre-crisis GDP level would be reached again only in 2024 instead of early 2023 as in the baseline.

Ecuador is a full-dollarized country since 2000: this monetary framework allowed the ninth Latin American economy to reduce inflation from double digit to near zero but, at the same time, it prevents Central Bank from running an autonomous monetary policy to provide liquidity amid a crisis like Covid-19. Furthermore, dollarization hinders competitiveness of Ecuadorian goods, which suffer from the strength of US dollar, typical safe-haven currency during phases of global turmoil.

In addition to that, the Andean country is still heavily dependent on oil, accounting for 10% of GDP, 40% of total exports and 35% of public revenues. After the end of the so-called “commodity super cycle” in the midst of last decade, Ecuador lost its growth path, exposing the inherent fragility of the previous development pattern. In order to face these weaknesses and strengthen the dollarization regime, in spring 2019 Ecuador reached an agreement with IMF (in the form of an Extended Fund Facility) and other multilaterals to borrow 10.2 bn USD in three years.

The arrangement with the Monetary Fund was the first in fifteen years and continued the shift away of the country from the policy stance of former president Rafael Correa (2007-2017). Lenin Moreno, already Correa’s vice president from 2007 to 2013 and in office from mid-2018, moved gradually away from many initiatives of the former president, towards the centre of the political spectrum, becoming a sort of “champion of neoliberalism”.

The abrupt decision to cut fuel subsidies at the beginning of October 2019 is the best example of Moreno’s twist, showing a president more catholic than the Pope because IMF itself had recommended a more gradual phasing out of subsidies and he was eventually forced to backtrack from harsh measures by the blow-up of violent protests throughout the Country.

Up to now, foreign policy moves, though equally sharp, have not unleashed the same degree of popular upheaval: in August 2018 Ecuador left ALBA and in March 2019 UNASUR, turning its back on the Chavist model. Moreover, at the beginning of 2020, the country left OPEC but this decision, driven by economic reasons, was taken by the government to have free rein over oil output. Finally, Moreno’s goal to make Ecuador part of the Pacific Alliance remains alive and it would eventually mark the complete reversal of Ecuador’s foreign policy stance. Anyhow, Moreno’s desire is unlikely to be accomplished by the end of the current legislature. 

Unfortunately, the oil price freefall in March 2020, coupled with the violent outbreak of Covid-19, represented a deadly blow to Moreno’s dreams and to an already fragile economy, causing Ecuador to derail from IMF’s targets and, most importantly, to lose access to financial markets under mounting concerns about debt sustainability. About the latter, it is worth mentioning that the country has a poor sovereign risk track record in modern history.

Public debt more than doubled between 2013 and 2019, surging from 20% of GDP to almost 50%: this increase finds reason not only in the structural growth slowdown but also in the dramatic current expenditure increases under the Correa’s administration. Owing to the 2020 GDP fall, IMF’s forecasts debt/GDP ratio to reach 65% by the end of 2020 and to peak at 70% in 2023.

Financing needs^[1], already challenging before the 2020 double shock, are now not affordable and the government at the end of March expressed the will to restructure part of the external debt held by international investors (nearly 38% of the total stock). At the same time, the authorities introduced in May new procyclical austerity measures worth 4% of GDP. The restructuring process is ongoing and at the beginning of July, Ecuador reached a preliminary agreement with some of its largest bondholders. Moreno’s administration is eager to close the deal as soon as possible to receive fresh multilateral disbursements to close the residual financing gap for 2020 (IMF cannot provide new funds until the debt returns “sustainable”^[2]). Altogether, considering the systemic risks in Ecuador, adding stress might not be in the best interest of bondholders, who may also want to avoid an extension of negotiations into the election campaign.

The first round of the presidential elections is scheduled for February 2021 and the run is going to start at the end of summer 2020. Political and social tensions, already high in the country, have been exacerbated by corruption investigations led by the Moreno administration, which have implicated some senior members of Correa’s governments. Thus, the thirst for revenge of Correa and his mates is very high: both the former president and Lenin Moreno will not run in 2021 elections, the former because the popular referendum approved in 2018 limited presidential mandates to two and the latter because of health issues and low popularity.    

Covid-19 will leave therefore a poor legacy to Ecuador and other Latin American countries both on the humanitarian side and on the economic one. Multilateral aid and debt restructuring are necessary to let Ecuador take a breath but next year’s elections are crucial to understand the way the country will choose in this decade and if the political pendulum will swing again in this corner of South America.

NOTES

[1] Financial needs required to rollover maturing debt (fiscal deficit, plus any other transactions that require financing, plus amortization).

[2] The three-year EFF programme with Ecuador was cancelled by IMF at the end of May and would be replaced by another programme once public debt will be declared sustainable again. In the meantime, in May IMF approved an emergency line (RFI) of 643 mln USD in emergency assistance for the Andean country.